This article first appeared in The Edge Financial Daily on July 3, 2019

QL Resources Bhd
(July 2, RM6.82)
Maintain neutral with a higher target price (TP) of RM6.66: We recently met with QL Resources Bhd’s management for updates following the release of its latest quarterly results. QL’s outlook remains exciting especially within the convenience store chain segment. The growth in the segment will benefit the marine products manufacturing (MPM) segment as a part of an extension of QL’s food business.

We expect the convenience store segment to achieve a break-even stage this financial year (FY) but the positive impact is partially offset by a weaker performance in the palm oil activities segment. As a result, we tweak our FY20 to FY22F (forecast) earnings by 1% to 2.5%. Consequently, our discounted cash flow-based TP is raised marginally to RM6.66 (RM6.61 previously.) We maintain our “neutral” call on QL due to its expensive valuation.

QL’s MPM division contributes 27.9% and 56.2% of the group’s FY19 revenue and profit before tax (PBT) respectively. QL plans to increase the capacity of the Hutan Melintang plants in Perak by acquiring more land and investing in automation with a capital expenditure (capex) of approximately RM60 million in the near future. Besides, QL plans to allocate a capex of RM30 million to increase its current fleet size from 28 boats to 38 boats within the next five years. MPM PBT margin improved (FY18: 13.7% versus FY19: 15.2%) due to better fish catch cycle post El Nino in FY18. The group is currently venturing into new markets by collaborating with a big restaurant and China supermarket chain supplying surimi-based products. We believe QL is one of the beneficiaries of the ongoing trade war as we understand that QL’s export sales to the US and China have improved.

The integrated livestock farming (ILF) segment’s expansion plan mainly focuses on increasing layer production in Peninsular Malaysia and broiler production in Sabah and Sarawak. Besides, the poor egg prices in Peninsular Malaysia have seen moderate recovery from low since mid-2018 and are expected to see improvement in the margins moving forward. Regionally, QL intends to allocate capex of RM140 million for its Indonesian unit to increase the capacity of the day-old chicks production, broiler and egg production given the growth potential in the country.

Palm oil activities (POA): The group expects the bearish outlook to continue in FY20 mainly due to the lower crude palm oil prices. POA’s medium- to long-term growth potential is expected to be supported by the growing palm maturity from its Indonesia plantation where it is expected to provide higher fresh fruit bunches.

Convenience store chain: Based on the latest store count, QL currently has 105 FamilyMart stores across the Klang Valley, Johor and Negeri Sembilan, with an aim to achieve 170 stores by FY20F. Ultimately, the group’s target is to reach 300 stores by FY22F. We believe FamilyMart could potentially achieve break-even stage sooner than expected judging from its ability to introduce new products that attracts a larger crowd compared with its peers. As such, we now forecast the convenience store segment to break even this FY compared with our previous projection for this segment to break-even in FY21F.

QL’s emphasis on downstream integration in consumer food is supported by the change in consumers’ preference for convenience, providing an extension to QL’s food business and thereby strengthening its core value chain. Future growth drivers of QL include the expansion of the FamilyMart business, capacity growth in both MPM and ILF segments and the increasing maturity of its plantations in Indonesia. — PublicInvest Research, July 2